Results

• Below expectations – Reported core PATAMI of RM2.9m for 2QFY18 and RM5.7m for 1HFY18, which was 37.0% of HLIB forecast and 32.3% of consensus.

Deviations

• Lower-than-expected volume demand from major clientele – Perodua (due to mismatch of production planning and customer demand) and Nissan (disappointing sales volume).

Dividends

• Proposed interim dividend of 2sen/share (2QFY17: 2sen/share).

Highlights

• YoY : Group revenue dropped by 17.8%, due to a drop of 33.1% car seat sales volume, mainly dragged by lower demand from Perodua and Nissan. Nevertheless, the drop was partially offset by 8.9% higher demand for leather cut pieces from Toyota. Henceforth, core net profit dropped by 41.1% on lower sales volume and deteriorated economies of scale.

• QoQ : Despites the relatively higher 4.4% revenue, core earnings was relatively flat at -0.9% due to higher sales mix from leather cut pieces for Toyota (lower margin segment).

• YTD : Core earnings dropped by 37.0%, dragged by a drop of 31.3% in car seat sales volume, especially from Perodua and Nissan.

• Outlook : Pecca is expected to leverage on the strong demand from Perodua newly launched MyVi, which has received outstanding bookings of 48k units since launch in Nov 2017. Over 40% of the bookings are the advance 1.5l model equipped with leather seats (supplied by Pecca).

• We expect Pecca to continue to benefit from the ongoing strong demand for Perodua model line-up. Perodua is expected to launch new SUV model in 2018 and a potentially replacement model for MPV Alza.

Risks

• Increase in cow leather hide price.

• Continuous depreciation of RM.

• Margin squeeze by OEM clients.

Forecasts

• Unchanged, pending analyst briefing later today.

Rating

BUY ↔

• We like Pecca for its stable automotive business prospects as automotive players increase production volume and leather programs as well as new penetration into aviation business. Pecca is expected to generate strong operating cash flow of RM20-24m per annum (for FY18-20) on top of its current net cash position of RM96.8m (translating into 52 sen/share).

Valuation

• Maintain BUY on Pecca with unchanged TP of RM1.95 as we peg P/E of 18.0x on FY19 EPS on stable earnings growth potential, net cash of over RM90.0m (ex-cash P/E of ~13.0x for FY19), and potentially higher dividend payout.

Source: Hong Leong Investment Bank Research - 28 Feb 2018